Navigating the complex world of personal finance can be challenging, especially when faced with the possibility of bankruptcy or mortgage foreclosure. In this comprehensive guide, we’ll demystify the intricacies of bankruptcy and mortgage foreclosure in Canada, offering key insights and practical advice for homeowners grappling with financial stress.
Bankruptcy vs. Mortgage Foreclosure: What’s the Difference?
While both bankruptcy and mortgage foreclosure are outcomes of debt default, they differ in numerous ways. Bankruptcy is a legal procedure regulated by the government that allows individuals to erase their debt. Contrarily, mortgage foreclosure is a legal process initiated by the lender to reclaim the property when the borrower fails to make mortgage payments.
Understanding Bankruptcy
Bankruptcy is a solution for individuals unable to meet their debt obligations. It entails surrendering your assets to a Licensed Insolvency Trustee, who then arranges payment to your creditors. It’s crucial to note that bankruptcy focuses on unsecured debt, which doesn’t require any collateral. Credit cards, personal loans, and lines of credit are examples of unsecured debt.
Unveiling Mortgage Foreclosure
Mortgage foreclosure is a process that allows your lender to seize your property if you stop making mortgage payments. This property is then rented or sold to recover the owed amount. Unlike unsecured debt, a mortgage is a secured debt with your property serving as collateral. This provides the lender with financial protection in case of default.
The Mortgage Foreclosure Process in Canada
The foreclosure process in Canada ensues when you miss several mortgage payments over an extended period. It involves the following steps:
- Your lender files a lawsuit, giving you 20 days to respond.
- Failing to respond within this period with a valid defense, the court considers your mortgage as default.
- The lender then seeks court authorization for foreclosure.
- The court issues a Redemption Order, specifying the period within which you can make up for missed payments.
This process is typically lengthy and complex, taking between 6 to 10 months.
How Bankruptcy Affects Your Ability to Keep Your Home
While you can’t eliminate a mortgage through bankruptcy, it doesn’t necessarily put your home at risk. Bankruptcy laws in Canada prohibit lenders from voiding your mortgage contract automatically. You can retain your home as long as you fulfill your mortgage payment obligations. Post-bankruptcy, the absence of unsecured debt allows for more available funds for mortgage payments.
Understanding Exempt and Non-Exempt Home Equity
When filing for bankruptcy, you might have to surrender a portion of your home equity. Canadian bankruptcy law categorizes home equity into:
- Exempt Equity: Not accessible to creditors.
- Non-exempt Equity: Available to creditors.
You must pay the cash equivalent of your non-exempt home equity to your Licensed Insolvency Trustee. These funds are then forwarded to your creditors to clear your outstanding debt.
What Happens If You Surrender Your Home Post-Bankruptcy?
If you choose to relinquish your home to your lender after declaring bankruptcy, they assume all associated risks. However, it’s important to note that you could still face legal action from the mortgage insurer if the mortgage was insured.
Strategies to Evade Mortgage Foreclosure
Here are some strategies to avoid mortgage foreclosure due to overdue mortgage debt:
- Extend your amortization period: You can ask your lender to extend your amortization period, resulting in reduced monthly payments.
- Transfer your mortgage: Consider shopping around for better mortgage offers.
- Refinance your mortgage: If mortgage interest rates are dropping, it might be beneficial to refinance your mortgage.
- Negotiate a payment deferral: You can negotiate with your lender to extend your payment due dates.
- File a consumer proposal: This is an alternative to bankruptcy that allows you to negotiate a reduced debt payment plan with your creditors.
Should You File for Bankruptcy If Your Mortgage Is on the Brink of Foreclosure?
Filing for bankruptcy can relieve you of the financial pressure associated with high-interest, unsecured debt. However, the non-exempt portion of your home equity is still accessible to creditors during bankruptcy. Thus, a consumer proposal could be a more suitable option, allowing you to negotiate a reduced debt repayment plan without surrendering any assets.
Final Thoughts
If you’re at risk of losing your home to foreclosure, consulting a Licensed Insolvency Trustee can help you explore your options for managing your debt. They can guide you through bankruptcy or consumer proposal, helping you choose the best path to protect your home.
